Earn 4.5% on your savings, tax-free!

You can get a huge rate on your savings with this ISA from Halifax. But be warned, there is a catch...

ISA season is well and truly underway, with new products launched on what feels like a daily basis. The last couple of days have seen new or improved rates on ISAs from Halifax, Principality Building Society, Saffron Building Society and even the AA.

So what are the best ISAs on the market today?

Improving times for savers?

Last year I wrote a piece about the best possible rate offered on an ISA, which came from Skipton Building Society. My eye had been caught by the whopping rate of interest on offer – a rather tasty 5%. Compared to the rest of the deals being launched at the time, it seemed a killer.

Inevitably there was a catch – in order to secure that lovely rate, you needed to lock your cash up for a while. And we weren’t talking a year or two – you’d have to hand your cash over to Skipton for a full five years.

A year on, I was a little surprised to see that even locking your money up for half a decade won’t get you such a good rate. Here are the highest rates of interest available on five-year Cash ISAs.

ISA	AER	Minimum deposit
Halifax	4.5%	£500
BM Savings	4.25%	£500
Kent Reliance	3.75%	£1,000

So Halifax leads the way with the five-year deals with an eye-catching rate of 4.5%. As we shall see, if you fancy putting your money away for a while, Halifax offers some of the best deals across a range of terms.

So how do these rates compare to the best deals a year ago? And how do they compare to more short-term ISAs?

Three years of 0.5% base rate

Last week marked the three-year anniversary of Bank of England base rate tumbling to its record low of 0.5%, where it still languishes. To mark that anniversary, financial information firm Defaqto published some interesting research tracking how the best and average rates on Cash ISAs have changed (or not) over that time.

Here’s how the best rates on offer have changed since March 2009:

Cash ISA type	March 2009	March 2010	March 2011	March 2012
Instant / easy access	3.61%	3.50%	3.15%	3.30%
One-year fixed	3.20%	3.00%	3.10%	3.50%
Two-year fixed	3.30%	3.51%	3.50%	4.00%
Three-year fixed	3.25%	4.40%	4.01%	4.25%
Four-year fixed	3.35%	4.25%	4.30%	4.35%
Five-year fixed	3.25%	5.00%	5.00%	4.50%

So year-on-year, rates have improved on all forms of ISA except the five-year ISA. Somewhat strangely, the best rates on easy access ISAs today are actually worse than they were in 2009 and 2010, though at least they have improved since last year!

What caught my eye though is the minimal improvement you get from locking your cash up for years at a time.

From two to five years

It seems bizarre that locking your money up for five years, rather than two, will only secure you an extra 0.5% on your money. On a balance of £5,000, that’s the difference between a return of £5,225 and £5,175 in the first year – just £50.

Now if I was locking up my cash for an extra three years, I’d expect a somewhat better return.

Here are the top ISAs across 18 months, two, three and four years:

ISA	Term	AER	Minimum deposit
Cheshire BS Direct Fixed Rate ISA*	18 months	4%	£1,000
Santander Two-Year Fixed Rate Major ISA	Two years	4%	£1
Halifax Three-Year Fixed	Three years	4.25%	£500
Halifax Four-Year Fixed	Four years	4.35%	£500

*Doesn’t accept transfers

I really like the Cheshire 18-month ISA, but it won’t be a good bet for many savers, as it doesn’t accept transfers in from old ISAs. So while it’s great for new ISA savers, those who have been saving in ISAs for a while should look elsewhere.

There are plenty of downsides to sticking your money in a longer ISA in my view, the biggest of which is that at some point base rate is going to start moving north. And when it does, savings rates will do the same. So while the rates on offer look pretty attractive now, will they still be competitive in 2016 or 2017? I’m not so sure.

Besides, when the rates on offer across the different terms are so similar, sticking your cash in a long-term ISA just doesn’t seem worth it.

Short-term ISAs

So if you’d rather keep your savings close at hand in a one-year ISA, here are the best accounts for smaller deposits on the market today.

ISA	AER	Minimum deposit
AA Internet Access ISA Issue 3*	3.5%	£2,500
Cheshire BS Direct Cash ISA*	3.35% (includes 2.35% bonus until 30/09/13)	£1,000
Leeds BS One-Year Fixed Rate*	3.26%	£1
Metro Bank One-Year Fixed Rate	3.25%	£1
M&S Fixed Rate Saving Option Cash ISA	3.25%	£500
Bank of Scotland Fixed Cash ISA	3.15%	£500

*Doesn’t accept transfers

Personally, I’d be more inclined to stick my cash in a short-term ISA and see how things stand in a year’s time. But what are you going to do with your ISA allowance this year? Let us know in the Comment box below!

More on ISAs and savings:
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The UK's worst savings accounts